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CAG continues to make sense to us

When we initiated coverage of the consumer staples sector earlier this week, we suggested that consensus EPS estimates were too low for CAG.  This morning’s reported results bear out that position, in part, as CAG reported Q2 EPS of $0.57 versus consensus of $0.55.  Additionally, the company raised EPS guidance from $2.03 - $2.06 to “at least” $2.06.  Our forecast remains above that at $2.11.  The increased guidance comes without the benefit of share repurchase as the program has been suspended with debt reduction becoming the preferred use of cash as the company digests the RAH acquisition (calendar Q1 close, expected).

 

We see CAG as a relatively inexpensive name (13.8x calendar 2013 EPS versus the packaged food group trading at 17.6x) that has additional upside to earnings on a standalone basis as well as a transformative acquisition that is scheduled to close during calendar Q1 2013 that should provide investors a path to a higher EPS profile through accretion and synergies.  The knock on an otherwise fine quarter was the decline in volumes (-4%) as the company continues to lap pricing activity in the prior year.  Volumes should improve sequentially as the bulk of the pricing activity impacted prior quarters (70% by management commentary).  Further, investors should put these volume declines in perspective and compare and contrast with the “old” CAG where management would have been more concerned about chasing volume and less concerned about preserving profitability.  Instead, management delivers on profitability while continuing to invest in brand building, which should reap rewards in the coming quarters.

 

Also, a declining input cost profile as mentioned by the company and consistent with both our sector thesis and macro view should provide income statement flexibility going forward.  We see an opportunity for the stock price to move to the mid-$30s in the coming months.

 

 

Robert  Campagnino

Managing Director

HEDGEYE RISK MANAGEMENT, LLC

 

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JOSHUA STEINER: JOBLESS CLAIMS: THE LABOR MARKET REMAINS A SECTOR TAILWIND

Takeaway: SA initial jobless claims were higher for the first time in 5 weeks, but we expect them to resume their trend lower in the coming months.

Back to Normal

Last week jobless claims rose 18k to 361k, but the 4-week rolling average declined 14k to 368k and is now back to pre-Sandy levels. For the last month we've profiled NY, NJ and PA's share of claims. As of the most recent state data, which is released on a 1-week lag vs the nationally reported data, NY and PA have fully re-normalized. New Jersey, however, still remains at around 150% of its long-term average rate of claims (down from 408% the week of November 17th) , suggesting there may still be a small further tailwind in store for claims. 

 

Overall, we expect claims will continue to move lower in the coming months (through Februrary), propelled by a seasonality distortion tailwind. This, coupled with the strengthening/accelerating housing data, should keep the wind at the back of large-cap financials BAC & C. 

 

JOSHUA STEINER: JOBLESS CLAIMS: THE LABOR MARKET REMAINS A SECTOR TAILWIND - 1

 

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JOSHUA STEINER: JOBLESS CLAIMS: THE LABOR MARKET REMAINS A SECTOR TAILWIND - 8
 

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JOSHUA STEINER: JOBLESS CLAIMS: THE LABOR MARKET REMAINS A SECTOR TAILWIND - 12 

 

Joshua Steiner, CFA

 

Robert Belsky


More Of The Same

Client Talking Points

Crude Mood

Yesterday, we re-shorted Brent crude oil (OIL) in our Real-Time Alerts as it tested our immediate-term TRADE line of resistance of $110.02. With commodities deflating as growth stabilizes, oil is poised to take a beating over the next few months and can go a long way down from here. If the US dollar is able to stabilize and strengthen, it will add to oil’s woes. 

Stop The Presses

It wouldn’t hurt for central planners to shut the printing presses off for a bit and hit Cancun for a week. Japan is the latest country to join the party of those who think printing more money over and over again is the solution to any problem. Look at how well its worked out for the Eurozone and the United States! Our third round of quantitative easing is clearly not working the way Ben Bernanke thought it would. Gone are the long-term artificial bull markets created from Fed announcements. Clearly, more of the same isn’t working. We’ll continue to be long consumption and short commodities, including oil.

Asset Allocation

CASH 52% US EQUITIES 24%
INTL EQUITIES 12% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 12%

Top Long Ideas

Company Ticker Sector Duration
NKE

Our competitors are neutral to bearish on the name ahead of earnings, but we think they’re missing the bigger picture. We think concerns over the shoe cycle rolling over are overdone. With R&D in the mid-teens, NKE has the ability to drive the ‘sneaker cycle’ in a case of “the tail wagging the dog”. We also think $NKE is a candidate for releasing a special dividend when they report EPS next week.

SBUX

Uncertainty in US from a macro perspective (jobless claims uptick) gives us pause from TRADE perspective although coffee prices will serve as a tailwind going forward. Company is becoming more complex, taking on risk as it acquires new brands. Longer-term, we view Starbucks, along with YUM, as one of the most attractive global growth stories in our space.

FDX

Margins are in a cycle trough as the USPS is on the brink. FDX is taking more share in the U.S. and following the recent $TNT news flow we think $UPS is in a tough spot.

Three for the Road

TWEET OF THE DAY

“On an operating basis $DRI burned about $250MM in cash... before spending the $578MM to buy Yard House!” -@HedgeyeHWP

QUOTE OF THE DAY

“There is no greater importance in all the world like knowing you are right and that the wave of the world is wrong, yet the wave crashes upon you.” -Norman Mailer

STAT OF THE DAY

IntercontinentalExchange (ICE) to buy NYSE Euronext (NYX) for about $8.2 billion.


Early Look

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THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – December 20, 2012


As we look at today's setup for the S&P 500, the range is 21 points or 0.68% downside to 1426 and 0.78% upside to 1447.        

                                                                                                                                                       

SECTOR AND GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

THE HEDGEYE DAILY OUTLOOK - 3

 

THE HEDGEYE DAILY OUTLOOK - 4

 

EQUITY SENTIMENT:


THE HEDGEYE DAILY OUTLOOK - 10


CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 1.51 from 1.53
  • VIX closed at 17.36 1 day percent change of 11.50%

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: 3Q GDP, est. 2.8% (prior 2.7%)
  • 8:30am: Personal Consumption, 3Q, est. 1.4% (prior 1.4%)
  • 8:30am: Core PCE, 3Q, est. 1.1% (prior 1.1%)
  • 8:30am: Init. Jobless Claims, Dec. 15, est. 360k (prior 343k)
  • 8:30am: Cont. Claims, Dec. 8, est. 3.200m (prior 3.198m)
  • 9:45am: Bloomberg Consumer Comfort, Dec. 16 (prior -34.5)
  • 9:45am: Bloomberg Economic Expectations, Dec. (prior 4)
  • 10am: Freddie Mac mortgage rates
  • 10am: Philadelphia Fed., Dec., -3.0 (prior -10.7)
  • 10am: Existing Home Sales, Nov., est. 4.90m (prior 4.79m)
  • 10am: Leading Indicators, Nov., est -0.2% (prior 0.2%)
  • 10am: House Price Index, Oct., est. 0.3% (prior 0.2%)
  • 10:30am: EIA natural gas storage change
  • 11am: Fed to purchase $1.5b-$2.25b notes in 2023-2031 sector
  • 1pm: U.S. Treasury to sell $14b 5Y TIPS in reopening
  • 2pm: Fed to sell $7b-$8b notes in 2015-2016 sector

GOVERNMENT:

    • Washington Day Ahead
    • House, Senate in session
    • Senate Banking panel holds hearing on rebuilding after Hurricane Sandy, 11am
    • House Intelligence hold closed meeting to consider national security issues posed by Chinese telecommunications companies Huawei, ZTE, 9am
    • SEC holds closed meeting on enforcement matters, 2pm
    • FERC holds monthly meeting on power-grid reliability, 10am

WHAT TO WATCH

  • IntercontinentalExchange said in talks to buy NYSE Euronext
  • Budget talks deteriorate amid Republican identity shift on taxes
  • AMR said to take steps moving closer to merger with US Airways
  • BofA’s Moynihan said to kill proposal to cut payouts for brokers
  • Google to sell Motorola Home to Arris for $2.35b
  • 3 former Swiss bank advisers charged by U.S. with conspiracy
  • U.S. housing values rose 6% in 2012 for 1st gain in 6 yrs: Zillow
  • Bank of Japan expanded its asset-purchase program for 3rd time in 4 mos.
  • U.K. Nov. retail sales unchanged, median est. 0.4% increase
  • Roche may agree to buy Illumina for $66/shr, L’Agefi says
  • Carl Icahn’s American Railcar sweetened its offer for Greenbrier by 10%, set a deadline of tomorrow
  • Allscripts replaced CEO, said no longer planning to sell itself
  • Pershing’s Ackman to speak at Ira Sohn special event on Herbalife
  • Accenture falls after longer consulting projects crimp rev.

EARNINGS:

    • Darden Restaurants (DRI) 7am, $0.30
    • ConAgra Foods (CAG) 7:30am, $0.55
    • CarMax (KMX) 7:35am, $0.39
    • KB Home (KBH) 8am, $0.06 - Preview
    • Discover Financial Services (DFS) 8:30am, $1.13 - Preview
    • Neogen (NEOG) 8:45am, $0.27
    • Carnival (CCL) 9:15am, $0.11
    • Micron Technology (MU) 4pm, $(0.20)
    • Red Hat (RHT) 4:04pm, $0.29
    • Tibco Software (TIBX) 4:04pm, $0.37
    • Research In Motion (RIM CN) 4:05pm, $(0.35) - Preview
    • Nike (NKE) 4:15pm, $1.00
    • Cintas (CTAS) 4:15pm, $0.62

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

 

OIL – we re-shorted Oil yesterday as it tested immediate-term TRADE resistance of $110.02 Brent; it’s a long way down from here for Oil, especially if the USD holds higher long-term lows here – Down Oil is the bull case for Long Consumer Stocks (we bought back XLP, Consumer Staples) on red yesterday.

  • Brent Crude Trades Near Two-Week High as North Sea Exports Drop
  • Silver Vaults Stuffed Means Price Rising 30% in ’13: Commodities
  • Copper Declines for a Fourth Day in New York on U.S. Budget
  • Gold Climbs in New York After Two Days of Declines; Silver Gains
  • Coal Rebound Seen From Biggest Drop Since 2005: Energy Markets
  • Ethanol Fuel Blend Wall Can Be Eased With Higher Blends, Exports
  • Palm to Test 1,950 Ringgit in Bearish Trend: Technical Analysis
  • Rubber Declines From Seven-Month High on U.S. Budget Concerns
  • Vale Seen Paying $158 Million More for Shipping by Alphabulk
  • Wheat Drops Below $8 a Bushel for the First Time in Five Months
  • Uralkali Sees 2013 Potash Supplies Recovering to 55 Million Tons
  • India Sugar Imports Seen Surging as Global Glut Cuts Prices
  • Chaebol Founder Dismantles Life’s Work as Slump Deepens: Freight
  • Lumber Is Top Pick by Scotiabank Leading 2013 Commodities Rally

THE HEDGEYE DAILY OUTLOOK - 5

 

CURRENCIES


THE HEDGEYE DAILY OUTLOOK - 6

 

EUROPEAN MARKETS


ITALY – Italian Retail Sales -3.8% y/y in OCT vs -1.6% SEP continued to worsen and the MIB Index looks very different than the DAX now (DAX making higher-highs vs SEP, MIB making lower-highs); we haven’t been short anything Europe for a while, but Italian stocks looking more interesting now, short side. Timing matters.


THE HEDGEYE DAILY OUTLOOK - 7

 

ASIAN MARKETS


JAPAN – hello my old friend volatility! The Japanese are pulling a Bernanke here and getting the same results (inflated stock market and no economic recovery); Japanese Exports down -4.1% y/y in NOV is a certified economic disaster and they just upped their asset purchase fund to 76 TRILLION Yens (from 66T) and the market didn’t think that was enough!

 

THE HEDGEYE DAILY OUTLOOK - 8

 

MIDDLE EAST


THE HEDGEYE DAILY OUTLOOK - 9

 

 

The Hedgeye Macro Team

 

 

 


CHART DU JOUR: MACAU COSTS

Slowing revenue growth could put focus on costs


  • Gaming employee wage growth in Macau has accelerated consistently since 2009 and Macau CPI even faster.   The government estimates CPI in 2013 to grow at 6%, similar to 2012.
  • Indeed, the president of the Macao Hotel Employees Association said that hotel employees are asking for at least a 6% salary increase next year.
  • With GGR growth of +30%, costs were not such a glaring concern.  With 2013 GGR growth expected to slow into single digits (our estimate is +9%), margin expansion may be limited.
  • We are particularly worried about Wynn’s margins since its GGR may only be flat in 2013. 

 

CHART DU JOUR: MACAU COSTS - mg



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